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insurance contracts
Objective
  1. The objective of this Indian Accounting Standard (Ind AS) is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this Ind AS as an insurer). In particular, this Ind AS requires:
    1. limited improvements to accounting by insurers for insurance contracts.
    2. disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.
Scope
  1. An entity shall apply this Ind AS to:
    1. insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.
    2. financial instruments that it issues with a discretionary participation feature (see paragraph 35). Ind AS 107, Financial Instruments: Disclosures, requires disclosure about financial instruments, including financial instruments that

# This Ind AS was notified vide G.S.R. 111(E) dated 16th February, 2015 and was amended vide Notification No. G.S.R. 365(E) dated 30th March, 2016, G.S.R. 310(E) dated 28th March, 2018, G.S.R. 273(E) dated 30th March, 2019 and G.S.R. 419(E) dated 18th June, 2021.

1 This Indian Accounting Standard shall come into effect for insurance companies from the date to be separately announced.

contain such features.

  1. This Ind AS does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (see Ind AS 32, Financial Instruments: Presentation, Ind AS 107 and Ind AS 109, Financial Instruments).
  2. An entity shall not apply this Ind AS to:
    1. 2product warranties issued directly by a manufacturer, dealer or retailer (see Ind AS 115, Revenue from Contracts with Customers and Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets).
    2. employers’ assets and liabilities under employee benefit plans (see Ind AS 19, Employee Benefits, and Ind AS 102, Share- based Payment) and retirement benefit obligations reported by defined benefit retirement plans.
    3. 3contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, variable lease payments and similar items), as well as a lessee’s residual value guarantee embedded in a lease (see Ind AS 116, Leases, Ind AS 115, Revenue from Contracts with Customers, and Ind AS 38, Intangible Assets).
    4. financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either Ind AS 32, Ind AS 107 and Ind AS 109 or this Ind AS to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.

2 Substituted vide Notification No. G.S.R. 365(E) dated 30th March, 2016 and, thereafter, substituted vide Notification No. G.S.R. 310(E) dated 28th March, 2018.

3 Substituted vide Notification No. G.S.R. 365(E) dated 30th March, 2016 and, thereafter, substituted vide Notification No. G.S.R. 310(E) dated 28th March, 2018 and G.S.R. 273(E) dated 30th March, 2019.

  1. contingent consideration payable or receivable in a business combination (see Ind AS 103, Business Combinations).
  2. direct insurance contracts that the entity holds (ie direct insurance contracts in which the entity is the policyholder). However, a cedant shall apply this Standard to reinsurance contracts that it holds.
  1. For ease of reference, this Ind AS describes any entity that issues an insurance contract as an insurer, whether or not the issuer is regarded as an insurer for legal or supervisory purposes.
  2. A reinsurance contract is a type of insurance contract. Accordingly, all references in this Ind AS to insurance contracts also apply to reinsurance contracts.
Embedded derivatives
  1. Ind AS 109 requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. Ind AS 109 applies to derivatives embedded in an insurance contract unless the embedded derivative is itself an insurance contract.
  2. As an exception to the requirements in Ind AS 109, an insurer need not separate, and measure at fair value, a policyholder’s option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price differs from the carrying amount of the host insurance liability. However, the requirements in Ind AS 109 do apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a non- financial variable that is not specific to a party to the contract. Furthermore, those requirements also apply if the holder’s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).
  3. Paragraph 8 applies equally to options to surrender a financial instrument containing a discretionary participation feature.
Unbundling of deposit components
  1. Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:
    1. unbundling is required if both the following conditions are met:
      1. the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component).
      2. the insurer’s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.
    2. unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.
    3. unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).
  2. The following is an example of a case when an insurer’s accounting policies do not require it to recognise all obligations arising from a deposit component. A cedant receives compensation for losses from a reinsurer, but the contract obliges the cedant to repay the compensation in future years. That obligation arises from a deposit component. If the cedant’s accounting policies would otherwise permit it to recognise the compensation as income without recognising the resulting obligation, unbundling is required.
  3. To unbundle a contract, an insurer shall:
    1. apply this Ind AS to the insurance component.
    2. apply Ind AS 109 to the deposit component.
Recognition and measurement
Temporary exemption from some other Ind ASs
  • Paragraphs 10–12 of Ind AS  8, Accounting Policies, Changes in Accounting Estimates and Errors, specify criteria for an entity to use in developing an accounting policy if no Ind AS applies specifically to an item. However, this Ind AS exempts an insurer from applying those criteria to its accounting policies for:
  1. insurance contracts that it issues (including related acquisition costs and related intangible assets, such as those described in paragraphs 31 and 32); and
  2. reinsurance contracts that it holds.
  1. Nevertheless, this Ind AS does not exempt an insurer from some implications of the criteria in paragraphs 10–12 of Ind AS 8. Specifically, an insurer:
    1. shall not recognise as a liability any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the end of the reporting period (such as catastrophe provisions and equalisation provisions).
    2. shall carry out the liability adequacy test described in paragraphs 15–19.
    3. shall remove an insurance liability (or a part of an insurance liability) from its balance sheet when, and only when, it is extinguished—ie when the obligation specified in the contract is discharged or cancelled or expires.
    4. shall not offset:
      1. reinsurance assets against the related insurance liabilities; or
      2. income or expense from reinsurance contracts against the expense or income from the related insurance contracts.
    5. shall consider whether its reinsurance assets are impaired (see paragraph 20).
Liability adequacy test
  • An insurer shall assess at the end of each reporting period whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of
its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in profit or loss.
  1. If an insurer applies a liability adequacy test that meets specified minimum requirements, this Ind AS imposes no further requirements. The minimum requirements are the following:
    1. The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees.
    2. If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss.
  2. If an insurer’s accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 16, the insurer shall:
    1. determine the carrying amount of the relevant insurance liabilities4 less the carrying amount of:
      1. any related deferred acquisition costs; and
      2. any related intangible assets, such as those acquired in a business combination or portfolio transfer (see paragraphs 31 and 32). However, related reinsurance assets are not considered because an insurer accounts for them separately (see paragraph 20).
    2. determine whether the amount described in (a) is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of Ind AS 37. If it is less, the insurer shall recognise the entire difference in profit or loss and decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance
  4 The relevant insurance liabilities are those insurance liabilities (and related deferred acquisition costs and related intangible assets) for which the insurer’s accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 16.   liabilities.
  1. If an insurer’s liability adequacy test meets the minimum requirements of paragraph 16, the test is applied at the level of aggregation specified in that test. If its liability adequacy test does not meet those minimum requirements, the comparison described in paragraph 17 shall be made at the level of a portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio.
  2. The amount described in paragraph 17(b) (ie the result of applying Ind AS 37) shall reflect future investment margins (see paragraphs 27–29) if, and only if, the amount described in paragraph 17(a) also reflects those margins.
Impairment of reinsurance assets
  1. If a cedant’s reinsurance asset is impaired, the cedant shall reduce its carrying amount accordingly and recognise that impairment loss in profit or loss. A reinsurance asset is impaired if, and only if:
    1. there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the cedant may not receive all amounts due to it under the terms of the contract; and
    2. that event has a reliably measurable impact on the amounts that the cedant will receive from the reinsurer.

20A-20Q 5[Refer Appendix 1]

20R-20S 6[Refer Appendix 1]

Changes in accounting policies
    1. Paragraphs 22-30 apply both to changes made by an insurer that already applies Ind ASs and to changes made by an insurer adopting Ind ASs for the first time.
  • An insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making
  5 Inserted vide Notification No. G.S.R. 419(E) dated 18th June, 2021. 6 Inserted vide Notification No. G.S.R. 419(E) dated 18th June, 2021.  
needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in Ind AS 8.
    1. To justify changing its accounting policies for insurance contracts, an insurer shall show that the change brings its financial statements closer to meeting the criteria in Ind AS 8, but the change need not achieve full compliance with those criteria. The following specific issues are discussed below:
      1. current interest rates (paragraph 24);
      2. continuation of existing practices (paragraph 25);
      3. prudence (paragraph 26);
      4. future investment margins (paragraphs 27–29); and
  • shadow accounting (paragraph 30). Current market interest rates
  1. An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities7 to reflect current market interest rates and recognises changes in those liabilities in profit or loss. At that time, it may also introduce accounting policies that require other current estimates and assumptions for the designated liabilities. The election in this paragraph permits an insurer to change its accounting policies for designated liabilities, without applying those policies consistently to all similar liabilities as Ind AS 8 would otherwise require. If an insurer designates liabilities for this election, it shall continue to apply current market interest rates (and, if applicable, the other current estimates and assumptions) consistently in all periods to all these liabilities until they are extinguished.
Continuation of existing practices
  1. An insurer may continue the following practices, but the introduction of any of them does not satisfy paragraph 22:
    1. measuring insurance liabilities on an undiscounted basis.
  7 In this paragraph, insurance liabilities include related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32.  
  1. measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services. It is likely that the fair value at inception of those contractual rights equals the origination costs paid, unless future investment management fees and related costs are out of line with market comparables.
  2. using non-uniform accounting policies for the insurance contracts (and related deferred acquisition costs and related intangible assets, if any) of subsidiaries, except as permitted by paragraph 24. If those accounting policies are not uniform, an insurer may change them if the change does not make the accounting policies more diverse and also satisfies the other requirements in this Ind AS.
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